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It was another week of sellers bailing out of stocks which means we are one step closer to a market bottom. Stocks go through cycles of fear and greed with longer periods of rationale investing in between. For most of last year, my partners felt I was on a rant railing against the ridiculous valuations of everything from crypto currencies to blue chip mega caps. I take comfort in the knowledge that this is not my first rodeo and when manic periods take place, eventually people who think they are “investing” in the markets, wake up to the sudden realization that they are in fact gambling. Forget balance sheets and income statements (read sales only), for much of last year, stocks moved up in reaction to a cyclical belief that profits and dividends don’t matter.

But it gets worse. Newbie investors, feeling wealthy from skyrocketing cryptocurrencies, in all probability levered their wealth by using it as collateral to buy high growth concept stocks that would succeed because the world is operating under a new paradigm. Or perhaps it unfolded the opposite way. Soaring concept stocks were used as leverage to “diversify” into crypto currencies. According to Statista, there were 951 Initial Public Offerings in 2021 up from 431 in 2020 and the previous all time high 486 in 1999. What does that mean? Well in my opinion, Wall Street was drunk on near zero interest rates, and as long as a tech company could forecast a profit five years out, (no independent verification mind you), then the capital markets divisions could dress it up, put lip stock on it and flog it to cash rich speculators. It boggles the mind. I cannot tell you how many times last year, I went to www.sec.gov and downloaded their version of a prospectus, glanced at their income statement only to discover that (in my opinion) the only way these companies were able to even have a hope of making it to the public markets was due to salaries being paid in stock and stock options while they were private with the promise of riches once Wall Street underwrote their company.

And just like 1999, Wall Street was minting millionaires with IPO after IPO…well sort of. Some of those shares and stock options are actually in a lock up for a number of months which means they looked like millionaires on paper but, had to wait and hope the price would stay up until they were free trading paper. Luckily for them, they had the Federal Reserve mistakenly on their side, dumping billions into the capital markets monthly, driving interest rates to near zero. The music lasted into January of 2022. Then the prospects of runaway inflation reared its ugly head, forcing central banks to rethink their wheelbarrows of money from helicopters practise to a more prudent approach to managing money supply.

And like every bubble, it did not pop immediately, but rather started slowly, with overpriced meme stocks and IPO concept stocks taken to the woodshed and beaten with a stick. Wall Street is a fickle lover. They will seduce and woo you in order to earn sizeable corporate finance, only to spurn and abandon you with no in between. Wall street has its ears close to the ground and knew that time was running out and tried to temper government leaders and monetary leaders that they would be fiscally responsible and make sure companies going public could survive on their own merits.

But by that time the cat was out of the bag. Talk about an about face. Just over five weeks ago Mr. Powell, the chair of the Federal Reserve ruled out anything more than a 50BP increase to the Fed Funds rate and flash forward to the 16^th and he raised it by 75BP only to be chastised by many on Wall Street for being too meek in his approach.

Which brings us to the end of June, when both good companies and bad companies are being pilloried for the slightest infraction. C- suite executives do their best to provide guidance on how their companies are doing quarter over quarter, but with rapidly changing economic conditions, most do not want to stick their neck out, for fear of class action lawsuits filling up their calendars for years to come. So now, with more and more keeping their mouth’s closed, it only takes a rumour or speculation of an exogenous event to derail their stock price.

Six months ago, you could count the bearish predictions for stocks on two hands, now you can count the number of bullish predictions as everyone else rushes to revise their predictions downwards. And its not just stocks anymore. Bond market analysts, commodity analysts have joined in the negative parade. Only the crypto fanatics believe this is the buying opportunity of the decade. And they may be right, but personally I don’t want to own what I believe is to be electronic monopoly money. I am sure with increased volatility, disciplined traders will make out like bandits buying low and selling high, but I think the average investor will succumb to emotional rollercoasters and end up losing a lot of money.

It’s Canada day tomorrow and the 4^th of July on Monday so expect quiet markets overall unless another major headline sends investors panicking. Next week begins the third quarter and although there are a dozen or so earnings on the docket, I think most investors will start their holidays which means lower volumes but sometimes greater price swings. We also get a further look at the US economy with ISM nonmanufacturing plus the jobs report on Friday. Don’t be surprised for increased volatility in energy prices. Over the last two months key metals including copper have turned down quickly, and if it is because central banks nudge economies into a short-term recession, even crude oil could fall further. That of course will hurt the TSX more than US markets but if we get another jump in interest rates in mid July, Canadian banks should take up the slack.

Happy trading and stay safe. Happy Canada Day everyone!!

Cheers Steve and Michele.

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